Are RMDs Back This Year or Will They Be Waived Again?

Q. I turned 70 in November 2019. I was planning on taking my first required minimum distribution (RMD) in May 2020 (when I turned 70½) until the government waived 2020 RMDs. Is my first RMD now due by May 2021? What about my wife, whose first RMD deadline would be April 1, 2021? Also, I have two IRAs and a 401(k). Must I withdraw the RMD amount from each one, or can I withdraw enough from one account to cover the total RMD amount required from all 3 accounts?

A. Due to the pandemic, required minimum distributions (RMDs)— intended to spread out a retiree’s savings, and the related taxes, over an expected lifetime — were waived in 2020. Barring any new legislation, you must resume or start RMDs in 2021.

Also, in 2020, the RMD age was raised by the SECURE Act, so those who turn 72 this year have until April 1, 2022, to take their distribution. Those older than 72 must take their RMDs by Dec. 31.

In your situation, if you turned 70 in November 2019, you were born in November 1949; so, your first RMD is due by April 1, 2022. But subsequent RMDs are due annually by Dec. 31. So, it would be sensible to take your first RMD in 2021. Otherwise, you’ll have to take two RMDs in 2022.

For those whose first RMD deadline was April 1, 2021, that deadline applied to 2020 RMDs, which are waived. Those people don’t have to take an RMD until Dec. 31, 2021. Technically, it’s their second RMD, thanks to the 2020 waiver.

RMD Advice for Retirement Income Planning

Vanguard’s Maria Bruno and others offer tips on RMDs and retirement income planning in this unusual year. Here are some things you should know:

The cost of not taking the distribution is significant: A 50% excise tax for the amount that should have been taken.
The required withdrawal amount is based on life expectancy tables provided by the IRS and your account balances on the last day of the prior year. For instance, RMDs for 2020 were supposed to be based on account balances on December 31, 2019. Note: The IRS has just updated the tables to reflect longer life expectancies. These revised tables will take effect in 2022.
Start thinking about withdrawal strategies before RMD age: Bruno notes that retirees should think about RMDs as an “asset pool.” According to Bruno, “(r)etirees under 72 who are withdrawing from IRAs and 401(k)s should consider this: If you have flexibility in having taxable assets or tax-deferred or Roth assets, they can be surgical on a year-by-year basis to think about: How can I minimize both the liability this year, but then also what I might be looking at in the future?”
A lot of individuals are sitting on large tax-deferred balances, and while there is a benefit to not touching them because they can continue to enjoy tax-deferred growth, some individuals, given the size of their IRA or 401(k), can be subject to pretty large mandated distributions, which would then come with large tax liabilities. Leading up to age 72, retirees could start to withdraw from those assets. Withdrawals from those assets before age 72 may mean a higher tax rate now, but would reduce the RMD later because of the smaller amount in the IRA. Another option is converting some of those assets to Roth IRAs, which are not subject to lifetime distributions.
Smaller distributions are coming in 2022: The IRS has distribution tables that allow you to calculate the amount you must withdraw from your retirement account annually. Those amounts are based on both your age and the value of your retirement account the year prior. The tables now in use rely on mortality data from 2002. The IRS will publish new RMD distribution tables in 2022, factoring in today’s greater life expectancies – about two years. Therefore, RMD’s will be smaller beginning in 2022. As mentioned previously, you may take a distribution less than your full RMD, but you will have to pay a penalty of 50% of the required amount you failed to withdraw. And of course you may always take a distribution greater than your RMD; you will just have to pay taxes on it.
You don’t have to take RMDs from all accounts. You can divide up the distributions anyway you see fit as long as the total equals or exceeds the required amount.
Taxes matter, so work with a tax or financial professional, such as myself: This is key because withdrawal strategies, including Social Security timing decisions, have tax consequences beyond RMDs. Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care financial advisor through my financial services company, Lifecare Financial Services, LLC, which has been in business since 2006. Contact us to work on your retirement planning and estate planning today!

What About IRA’s and 401(k)s?

When it comes to IRAs, the Internal Revenue Service sees your traditional individual retirement accounts as a single pool of money. You can withdraw your total RMD amount from one IRA or from any combination of IRAs.

What about the RMD from your 401(k)? You must take the first RMD from your individual retirement account by April 1 of the year after you turned 70½. But you can delay taking an RMD from the 401(k) if you’re still employed. (The deadline for first RMDs is now age 72, but only for people born after June 30, 1949.)

Learn more about RMDs and Moves You Should Consider Making with Your IRA

RMD rules have changed. It’s smart to double-check which ones apply to you. For more details on RMDs, please read my article, Understanding the Changing RMD Landscape in 2020.

Plan in Advance for Retirement

With the changing RMD landscape, the need for retirement planning and estate planning remains as important as ever. If you have not done your Estate Planning or Retirement Planning or had your Planning documents and Retirement Plan reviewed in the past several years, please don’t hesitate to call us fora no-cost initial consultation, or a free annual review for members of our Lifetime Protection Plan®:

Estate Planning Fairfax: 703-691-1888
Estate Planning Fredericksburg: 540-479-1435
Estate Planning Rockville: 301-519-8041
Estate Planning DC: 202-587-2797

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